Why Do Some Democrats Want to Give the Wealthy a Tax Break?
(Bloomberg Opinion) -- Northeastern Democrats are pushing President Joe Biden to repeal the cap on state and local tax deductions as a part of his administration’s American Families Act. That’s exactly the wrong approach. If they really want to help their middle- and lower-income constituents, they should eliminate the deduction entirely — and use the proceeds to fund a robust child allowance.
Expanding the SALT deduction is not the most obvious issue for Democrats. Although the deduction clearly benefits metropolitan areas on the coasts that reliably vote Democratic, the majority of its gains go to the most affluent households. It also adds to a distortion in the tax system that pits poor municipalities against rich ones.
The Tax Policy Center, for example, estimates that more than 80% of the benefits from the repeal of the SALT cap would flow to the top 5% of households. At the same time, repealing the SALT cap makes public amenities such as pools or public art centers effectively tax deductible, but only for the wealthy.
To understand why, consider two suburbs — one wealthy and the other not. Both decide to fund these civic improvements with an increase in property taxes. In the high-priced suburb, residents would be able to deduct the increased local taxes from their federal income taxes. As much as 37% (the top federal tax rate) of the cost would be borne by the entire nation. Residents of the lower-income municipality would get no such write-off.
How can such a blatantly regressive tax policy be endorsed by Democrats? Two words: cultural politics.
During the debate over the Tax Cuts and Jobs Act in 2017, surrogates for Donald Trump’s administration had to answer the criticism that capping the SALT deduction violated the Republican oath against tax increases. In response, some started calling the cap a “blue-state” tax increase in the hopes that rank partisanship would quell opposition.
To make this trick work, they were required to show that the cost would fall almost entirely on urban and suburban communities on the coasts. That meant capping the deduction at $10,000 rather than eliminating it altogether.
The maneuver served only to hold the door open for a repeal. Those who want to eliminate the cap completely no doubt hope that they can settle on a “compromise” of raising it to, say, $20,000. And they can keep coming back and arguing for further increases until they have effectively done away with the cap altogether.
This effort is made all the more palatable to Democratic leaders by partisan branding. This process could be mitigated if the majority of Democrats, who aren’t from wealthy districts, came together to eliminate the SALT deduction altogether.
Doing so would undoubtedly result in higher taxes for some middle-class families. To offset that effect — and earn some bipartisan support — Democrats should use the revenue to fund a child allowance program along the lines of Republican Senator Mitt Romney’s Family Security Act.
That bill would fund a child allowance of up to $4,200 per child per year for any family with an annual income of less than $400,000. A married couple with two children would gain more from this allowance than they would lose from the elimination of their SALT deduction, even if they were in the highest tax bracket. Less wealthy families would gain even more.
Defenders of the SALT deduction have long argued that capping and certainly eliminating it would cripple state governments as wealthy residents fled to low-tax jurisdictions, eroding the income tax base and crashing the housing market. Those fears were wildly overblown.
The future of America’s coastal metros will be determined mainly by changes in technology and their own ability to offer cost-effective government. With better zoning and stronger resistance to the more egregious demands of public unions, they’ll continue to thrive without the regressive and distortionary subsidy provided by the SALT deduction.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
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